Answer:
Assume the note indicates that Seneca is to pay Arctic the $40,000 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 40,000
Cr Sales revenue 37,037
Cr Discount on notes receivable 2,963
Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.
Assume the same facts as in requirement 1, and prepare the journal entry for Arctic to record collection of the payment on December 31, 2021.
Dr Cash 40,000
Cr Notes receivable 37,037
Cr Interest revenue 2,963
Assume instead that Seneca is to pay Arctic the $40,000 due on the note on December 31, 2022. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 40,000
Cr Sales revenue 34,294
Cr Discount on notes receivable 5,706
Discount on notes receivable is a contra asset account that decreases the net amount of notes receivable.
Assume instead that Arctic does not view the time value of money component of this arrangement to be significant, and that the note indicates that Seneca is to pay Arctic the $40,000 due on the note on December 31, 2021. Prepare the journal entry for Arctic to record the sale on January 1, 2021.
Dr Notes receivable 40,000
Cr Sales revenue 40,000
Explanation:
Non interest bearing notes must be recorded at present value, so we need to determine the present value of the payment:
Payment due December 21, 2021, PV = $40,000 / (1 + 8%) = $37,037
Payment due December 21, 2022, PV = $40,000 / (1 + 8%)² = $34,294
We use the discount on notes receivable account (contra asset account) to decrease the net value of notes receivable.
